Earlier this month, Kelly Blue Book reported that the average price for a new light vehicle – cars and light pick-up trucks – is right about at $32,000 in 2014. Reflect on that number for a moment. If you?re starting to feel priced out of the new car market, it?s not your imagination.
The usual catch-all explanation for such high prices is ?inflation?, but in doing some research you quickly find that the inflation monster hasn?t exactly worked uniformly across all financial spectrums. For example, in 1974 the median household income was $11,197. The average new car that same year was $3,750 – or about 33% of median household income.
The median household income today is $51,371, which means that the price of an average car is now just over 62% of median income. That means that in real terms – as a percentage of income – the price of a new car has nearly doubled since 1974! Everything hasn?t gone up uniformly – car prices increased much faster than incomes.
Now for the really bad news on car prices?
The really bad news is that the situation continues to get worse. The main culprit in the car price/income ratio deterioration is stagnant household incomes. Real wages in the US peaked out in 1972, and have been moving generally lower ever since. In fact, despite reassurances that we?re now a solid five years into the economic recovery, the current median income is nearly $5,000 lower than it was in 2007, when it stood at $56,189.
Yet still car prices have continued to increase, even against a background of declining incomes.
How can that be? There are several reasons:
- More generous lending terms ? buyers are often able to cover the higher purchase price of the car through larger loans with longer terms.
- Mandated costs ? these are government required upgrades in emission control and safety equipment.
- Rising production costs ? despite lower real wages, the cost of everything from insurance and utilities, to taxes and employee benefits have been rising steadily.
- Selling to the top tier – despite falling wages, the top five or 10% of households are making more money than ever, and this is the demographic highly promoted in the auto industry. And what the top 5% or 10% want in a car tends to define the market overall.
These are all structural reasons why the cost of cars will continue to rise, even if the decline in income continues well in the future.
The real issue: how to deal with rising car prices
As a nation, we’ve been dealing with an affordability crisis of one sort or another on an ongoing basis. Housing, healthcare and health insurance, and college education are some of the more obvious examples. And with each, the root cause is the same – prices outstripping the income to pay for them. It seems that cars are now part of that very same affordability crisis.
But on this one, don?t expect government intervention to come to the rescue. As with most things in life, in the end, we?re all on our own.
So what can we do about being priced out of the new car market? Here are some suggestions:
Buy on the lower end. Despite the $32,000 average sticker price for a new car, it is still possible to buy cars for substantially less. You should be able to choose from a decent selection of cars priced at below $20,000. That will remove a large chunk of the sting that comes with buying at the median price, or higher.
Use the 20/4/10 method. This is a common industry strategy involving a 20% down payment, a finance term of not more than 4 years, with a payment that will not exceed 10% of your monthly gross income. Those are excellent parameters to keep you from buying more car than you can comfortably afford. Of course, if your monthly debt burden is already straining your budget, this may not be a useful option.
Plan to keep your car for at least 10 years. One way to avoid the high cost of a new car is buying less frequently. The car companies would love us all to trade in our cars every four or five years for new ones, but that?s also one of the forces driving car prices higher (exaggerated demand). Most cars today are of sufficient quality that they can be driven for ten year or longer with proper maintenance. In fact, the average age of a US car is now a record 11.4 years, so it’s clear that this is a viable option.
Buy a used car. This may be the ultimate strategy for dealing with out of sight new car prices – simply decide that you?re not going to join the party. Even though a car can easily last for ten years or longer, there will always be people who will turn their?s in in five years or less. That guarantees a solid future source of decent quality used cars, that you can often buy at just a fraction of the cost brand new. This makes even more sense if like me, you work from home – as an increasing number of people do.
People often challenge the used car idea citing the high cost of repairs. But what would you rather pay – $2,000 a year for repairs, or $6,000 ($500 X 12 months) in new car payments – plus the higher auto insurance and ad valorem taxes that go with new cars? And for what it?s worth, you can pay a lot less than $2,000 a year for car repairs just by thinking outside the box.
Auto expense is rapidly becoming one of the biggest expenses in the American budget, so we?re going to spend some more time on the topic. On Monday, we?ll be talking about creating an automobile sinking fund as a way to manage and minimize auto expenses. I hope you?ll come back and check it out.
In the meantime, what do you think are the best ways to cope with the new car price spiral?
The price of everything just keeps going higher and higher. I wish my pay check would increase as quickly (or quicker) than the price of everything these days. How long till America runs out of money and credit? That day is not to far off in my opinion.
Hi Walter – That’s really true. This post about car prices is symtomatic of a serious problem that’s showing no signs of improving. On a national level, we could in theory survive this forever, since the government can continue to print and borrow what ever it needs. The X factor is the dollar status as the worlds reserve currency. If that cozy arrangement comes to an end, the big picture game we’ve been playing of throwing money at all of our problems will come to an ugly end. I don’t seen an alternative reserve currency on the horizon, so we better just dig in and learn to deal with the fallout.
That fallout is that it’s hitting the middle class hard. Incomes are stagnant and prices of everything we need on a critical basis are increasing faster than the CPI is telling us. Back in the 1980s, they used to talk about the “top 20%” of households. By the early 2000s, it was the “top 10%”. Now it’s the “top 1%, often referred to as “1%-ers”. The result is that the middle class is contracting rapidly. Our best way to deal with it is to find alternative strategies to earn a living and get the products and services we need for a comfortable life but at less than the going rate.
A lot of people are trying desperately to ignore this under the assumption that it’s a temporary phenomenon related to the last recession. But the longer term trend says otherwise.
I definitely agree with Walter. Khaleef always says that our country can not sustain the current standard of living, and that’s abundantly clear to me now.
I think our plan, when we choose to purchase another vehicle, is not to play. A used vehicle is fine for me. My requirements are that it’s something reliable that gets me safely from Point A to Point B – anything above that is just fluff.
Hi Sherian – I agree completely with Khaleef. The decline in standard of living in the US started in 2000, and it’s been getting gradually worse. We all need to find ways to live and prosper in a world with less on the monetary and material side. Cars are a big and growing part of the cost of living, and we need to find less expensive ways to own one. If you work from home – and I think more of us will in the near future – having a premium car will no longer be necessary.